BCOR 320 1nd Edition Lecture 35 Chapter 19: Starting a businessSole Proprietorship An unincorporated business owned by one person Advantages◦ Can run a business without taking any formal steps to create an organization◦ Not required to register with the government◦ Not required to file a separate tax return Disadvantages◦ Owner responsible for all of the business’s debts◦ Owner of a sole proprietorship has limited options for financing the businessCorporations Limited liability◦ Protects managers and investors from personal liability for the debts of the corporation and the actions of others Transferability of interests◦ Provide flexibility for enterprises small and large Duration◦ Perpetual existence – Can continue without their founder Logistics◦ Corporations involve a lot of expense and effort to create and operate Taxes◦ Because corporations are taxable entities, they must pay taxes and file returnsS corporations Shareholders of S corps have: ◦ The limited liability of a corporation ◦ The tax status of a partnership Restrictions faced are:◦ There can only be one class of stock◦ There can be no more than 100 shareholders◦ Shareholders cannot be partnerships or other corporations◦ Shareholders must be U.S. citizens or residents◦ Shareholders must agree that company should be an S corporationThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Close Corporation A company whose stock is not publicly traded Common provisions of close corporations:◦ Protection of minority shareholders◦ Transfer restrictions◦ Flexibility◦ Dispute resolutionLimited Liability Companies An LLC offers the limited liability of a corporation and the tax status of a partnership◦ Limited liability – Members are not personally liable for the debts of the company◦ Tax status – Income flows through the company to the individual members, avoiding double taxation of a corporation◦ Formation – To organize an LLC, charter and operating agreement is necessary◦ Flexibility – Can have members that are corporations, partnerships, or nonresidentaliens◦ Transferability of interests – Members must obtain the unanimous permission of the remaining members before transferring ownership rights◦ Duration – LLC can continue in operation even after a member withdraws◦ Going public – Loses its favorable tax status and is taxed as a corporation, not a partnership◦ Changing forms – Not considered a sale and does not have the same adverse tax impact◦ Piercing the LLC veil – If corporate shareholders do not comply with the technicalities of the law: May be held personally liable for the debts of the corporation◦ Legal uncertainty – New form of organization and the issues of law are not clear Lawsuits are expensive in both time and money◦ Choices: LLC v. corporation Tax status of an LLC is a major advantage over a corporation Reasons for venture capitalists to prefer C corporations Arcane tax issues C corporations are easier to merge, sell, or take public Corporations can issue stock options General legal uncertainty involving LLCsSocially Conscious Organizations Hybrids are called:◦ Flexible-purpose organizations◦ Benefit corporations◦ Low-profit limited liability companies◦ Community interest companies Such businesses focus on the interests of:◦ Stakeholders◦ Community◦ EnvironmentGeneral Partnership Partnership: An unincorporated association of two or more co-owners who carry who operate a business for profit Each co-owner is a general partner Taxes – Profits flow through the owners Liability – Partner is personally liable for the debts of the enterprise Whether or not she caused them Management rights Partners share both profits and losses equally Each partner has an equal right to manage the
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